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Importance of Asset Allocation in Retirement Planning


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Sep 05, 2022

By : Bajaj Allianz Life

You may look forward to the freedom that retirement brings, but if you want a comfortable life post-retirement, financial independence is essential too. You require enough planning, financially, to secure yourself and your family in the absence of a regular income. There may be additional costs to bear, besides living expenses, during retirement. These include medical costs, and costs to account for inflation, and other expenses. One way to plan your financial corpus for the future is to invest in different types of investment instruments. This is also known as asset allocation. Asset allocation refers to the quota of the allocation of total available funds to various investment products/instruments.

When you retire, you may not want to rely on your savings alone or be dependent on your children for your income. Therefore, it is vital to have a retirement plan in place while you are young. When you are young, you can afford to take risks with your investments, allocating funds in different assets to earn suitable returns. As you have a potentially long earning journey ahead of you, this is possible. Generally, the asset allocation instruments you may choose may be in equities, debt, or a combination of both. This largely depends on the funds to be allocated, the investment timeframe, and your risk tolerance.

 

Equity Allocation

 

An equity-based investment means that you allocate your funds to stocks listed on stock exchanges by various companies or other instruments which have equity as underlying asset. When you allocate funds to equity, you buy shares of a company based on a number of factors. Many investors consider investing in new companies like start-ups that show the possibility of growth in the future with an associated risk. This presents a chance to invest in companies that you can grow with and gain expected returns when the company reaches success and profitability. There is also risk associated with such investments. A retirement plan based on fund allocation to equity alone may be risky. Hence, you may consider investing only a portion of funds in equity.

As shares and stocks are prone to face volatile value swings upwards or downwards, you may lose money on the stock market. Nonetheless, when you see gains, these can be high. you may hold on to your assets for the long term, as this increases the probability of market linked returns. Hence, you have youth as an advantage while investing in stocks for your retirement when you are just embarking on your career. However, if retirement planning takes place while you are a bit older, say in your 40s, you may rather consider investing in less risky options than the stock market.

 

Debt Allocation

 

There are various ways that you can allocate your funds, balancing risk with safety. If you invest in debt-related instruments, asset allocation is more likely to be secure for you, compared to investment in equity. Investment in debt-linked instruments is mainly for risk-averse investors who would rather have low to moderate returns than the stress of risk. Debt instruments may be in the form of debentures or government bonds. These are assets that are of a fixed-income nature. These kinds of assets may be more appealing to older investors who fear risks and want a safety net instead. With debt asset allocation, the investor usually receives regular interest payments which can be used for a number of financial purposes. Just having a debt fund may not ensure sufficient enough returns to build a corpus for retirement. Hence, it is preferable to have a blend of assets like part of your wealth in equity, and part in debt or instruments which are mix of both. The debt part helps to stabilise any risks that equities may generate.

 

Hybrid or Mixed Allocation

 

The viable and steady way to allocate your assets so that it can help you achieve your retirement plan goals is a hybrid allocation. A suitable way to plan how much of a corpus you need, is to use a retirement calculator to do the maths. Once you know how much you need, you can invest in a variety of instruments and assets according to your timeframe of investment and the amount you wish to collect. If you go in for hybrid or mixed asset allocation, you may reap optimal benefits without too much risk. A mixed investment portfolio permits you to distribute your funds in such a way that may help a steady growth of your wealth.

 

Conclusion

 

Making a retirement plan and sticking to it diligently is more challenging than you think. Nonetheless, with a clear mind and proper calculation, you can find out how much you require to retire with grace and dignity. Planning for your retirement is not something you should avoid or put off until it is too late. The earlier you start, the better it will prove to be in the long run for you.

One mistake may be never to plan for your retirement, but the other may be to plan to allocate your wealth to just one or two types of instruments or products. While you are young, you must consider aiming for portfolio diversification. Asset allocation must be varied, and with the range of investment products on offer today, from the traditional FDs to cryptocurrency, among others, there is a lot you can allocate your wealth to. Although allocation of assets to gain market-linked returns is vital in youth, it is equally important to buy financial products that safeguard your interests, like health insurance and life insurance. In fact, there are life insurance products like ULIPs which invest in equity market. These may be some of the instruments you may choose to financially protect you and your family against the costs you may have to incur due to unpredictable circumstances. Today life is full of uncertainty, and you need financial backups during emergencies.

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